Comcast-Time Warner merger's effect on Internet studied

New York TimesApril 7, 2014 

— Since announcing plans to take over Time Warner Cable two months ago, Comcast has steadily beat the drum with one big message: The merger will not limit consumers’ choice in picking a cable television or high-speed Internet service provider.

Comcast is expected to repeat this message twice this week – on Wednesday during the first Senate hearings on the $45 billion deal, and again in legal filings it is expected to give to the two government agencies reviewing the merger.

But in highlighting how the two companies do not compete with each another in any metropolitan market, Comcast has exposed a potential weakness in its argument, legal experts say. The lack of overlap in cable TV is the legacy of government-granted local monopolies. But the government never granted monopolies in the unregulated, highly lucrative business of high-speed Internet service – an area where the two companies face little to no competition.

As a result, regulators are likely to focus as much on how the merger will affect the market for high-speed Internet, also known as broadband, as how it will affect cable TV service.

“The economic argument over broadband is going to be crucial in this case,” said Allen P. Grunes, a partner at the law firm GeyerGorey in Washington and the co-author of two recent papers examining the merger.

The questions about broadband competition also will loom large this week if Comcast, as expected, lays out its defense of the merger in filings with the Justice Department and the Federal Communications Commission. The merger requires approval of both agencies. The Justice Department looks solely at whether the merger violates antitrust laws, and it faces the burden of proof.

But the FCC has a broader mandate in examining whether the merger serves “the public interest.” In the FCC inquiry, the burden is on Comcast to prove its deal serves the public interest.

Comcast has said it will lessen the merger’s effect on cable television competition by keeping its share of the national cable market at no more than 30 percent. That will require it to divest itself of some of Time Warner Cable’s customers.

But Comcast’s share of the market for high-speed Internet is bigger than its share of the cable market – at least 40 percent, the company says. Critics of the merger say that if only truly high-speed Internet service is considered, meaning data transmission rates of 25 megabits per second or more, its share tops 50 percent.

As consumers steadily drop their cable subscriptions in favor of services such as Netflix, Amazon and YouTube to stream movies and TV shows through the Internet, high-speed Internet service is expected to become the more important business.

Comcast, however, might have provided evidence that it faces little competition in high-speed Internet in dozens of FCC petitions it filed during the past few years seeking to get out from under local cable rate regulation.

Cable rates cannot be regulated if a company proves there is “effective competition” in a market. A market is judged to be competitive if at least two companies each offer service to 50 percent of the households in the area, and if the market share of all providers, except the largest, is at least 15 percent.

In the petitions, Comcast argued that the nation’s two satellite television companies, DirecTV and Dish Network, meet those requirements in many markets by accounting for at least 15 percent of television service. While a few markets also have telecoms, usually AT&T or Verizon, competing to provide television service, most of the petitions cite only the satellite companies as rivals.

But satellite companies do not offer high-speed Internet service, as the technology prevents it. The time required for a television signal to travel to a satellite and back to Earth are significant enough to create untenable delays.

That means that in those markets, Comcast is usually the only provider of high-speed broadband using a cable modem – the fastest service going, next to fiber-optic cable, which is not widely available in the United States.

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